20-35 DCF, sensitivity analysis, no income taxes. (CMA, adapted) LVT is an international manufacturer of
fragrances for women. Management at LVT is...

Ell-35 DEF. sensitivity alalvsis. no income taxes. EMA. adaptedl L'tl'T is an international manufacturer of
fragrances for women. Management at LVT is considering expanding the product line to men's fragrances.
From the best estimates of the marketing and production managers. annual sales fall for cashl for this new
line are tobacco units atﬂﬁ per unit: cash variable cost is 5“] per unit; cash fbted cost is $5.“.mﬂ per
vear. The invesbnent project requires HUM,“ of cash outﬂow and has a project life of five vears. At the end of the ﬁve-year useful life. there will be no terminal disposal value. Assume all ca sh ﬂows
occur at year-end except for initial investment amounts. Men’s fragrance is a new market for Landom. and management is concerned about the reliabilitgr of
the estimates. The controller has proposed applving sensitivitv analvsis to selected factors. Ignore income
taxes in your computations. Landom's required rate of return on this project is 14%. Required 1. Calculate the net presentvalue ofthis investment proposal.
2. Calculate the effect on the net present value ofthe following two changes in assumptions. Il'l'reat each
item independenﬂv of the other.|I a. 59&quot;- reduction in the selling price.
b. 59&quot;- increase in the variable cost per uniL 3. Discuss how management would use the data developed in requirements I and I in its consideration of
the proposed capital investment.

Top Answer

The first thing to do is to determine the net cash flows of the the project. The net cash flows are the amount the project...
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